How to do exercises ME final & FA
CH9:
At what minimum price will the firm produce a positive output?
- Short run: revenue > total variable cost
- The firm’s short-run supply curve is its MC curve above minimum AVC.
- Calculate AVC and MC,
- If MC is greater than AVC for any quantity greater than 0, then the firm porducers in
the short run as long as price is positive
Find the output that minimizes average cost
- Minimum average cost: MC = AC
At what range of prices will the firm produce a positive output?
- Short run: as long as P=MC > AVC
At what range of prices will the firm earn a negative profit?
- When P=MC<AC, or at any price below MAC
- Positive profit when P>AC
When you want to find the output supplied/produced by a firm
- Set P = MC
Total output / each firm’s output = number of firms in the industry
What is the lowest price at which each firm would sell its output in the long run? Is profit
positive, negative or zero at this price?
In long run, profit falls to zero, which means that price falls to the minimum value of AC
P=AC means you earn zero economic profit
- Minimum average cost: MC=AC and solve for q
- Fill in q in MC equation to find p
- Earns economic profit of zero because P=AC
What is the lowest price at which each firm would sell its output in short run?
- The firm will sell its output at any price above zero in the short run, because
MC>AVC for all positive prices (MC=q/100 > q/200). Profit is negative if price is just
above zero
Producer surplus = profit + fixed cost
Is the industry in long-run equilibrium? If not, find the price associated with long-run
equilibrium
- Set P=MC, find q
- Find profit (TR-TC)
- The industry is NOT in long equilibrium because profit is greater than 0, if profit is 0,
industry is in long run equilibrium
, - In long run equilibrium, firms produce where P = MAC, and there is no incentive for
entry or exit
- To find MAC, set MR = AC, and solve for q
- To find the long run equilibrium price: substitute q into MC or AC to get p
Suppose new technology developed to reduce cost firm by 25%. Assuming firm is in long-run
equilibrium, how much would any one store be willing to pay to purchase this new
technology
- New cost and MC function can be found by multiplying old functions by 0.75
- Set P=MC, solve for q
- Find profit (TR-TC) use q
- This is most firm would willing to pay p.y for new technology. It will pay this amount
only if no other firms can adopt the technology. Because if all firms adopt new
technology, long run equilibrium price will fall to MAC of new technology and profits
will be driven to zero
CH9:
DWL refers to benefits lost by consumers and/or producers when markets do not operate
efficiently.
- Price ceiling below equilibrium price in PCmarket will result in DWL, because it
reduces the quantity supplied by producers
- Both producers and consumers lose surplus because less of the good is produced
and consumed
- Reduced (ceiling) price benefits consumers but hurts producers. Real culprit is the
reduction in the amount of the good in the market
Suppose supply curve for good is inelastic. If government imposed price ceiling below
market-clearing level, would a DWL result?
- No DWL because there is no reduction reduction in amount of goods produced
- Imposition of priceceiling transfers all lost producer surplus to consumers
Suppose government regulate sprice of good to be no lower than some minimum level. Can
such a minimum price make producers as a whole worse off?
With a minimum price set above the market-clearing price, some consumer surplus
is transferred to producers because of the higher price, but some producer surplus is
lost because consumers purchase less. If demand is highly elastic, the reduction in
purchases can offset the higher price producers receive, making producers worse off.
Increases by area A, decreases by larger area B, because quantity demanded drops
sharply.
- If suppliers produce more than Q’ loss PC greater because of unsold units
Suppose government imposes tax of $1 to reduce widget consumption and raise
government revenue. What will new eqQ be? What P will buyer pay? What amount will per
unit seller receive?
- Quantity bought must be equal to quantity supplied
- New eqQ: Pb – Ps = 1 (substitute demand and supply functions in Pb and Ps), find q
- What P will buyer pay: plug q in demand equation to find Pb
CH9:
At what minimum price will the firm produce a positive output?
- Short run: revenue > total variable cost
- The firm’s short-run supply curve is its MC curve above minimum AVC.
- Calculate AVC and MC,
- If MC is greater than AVC for any quantity greater than 0, then the firm porducers in
the short run as long as price is positive
Find the output that minimizes average cost
- Minimum average cost: MC = AC
At what range of prices will the firm produce a positive output?
- Short run: as long as P=MC > AVC
At what range of prices will the firm earn a negative profit?
- When P=MC<AC, or at any price below MAC
- Positive profit when P>AC
When you want to find the output supplied/produced by a firm
- Set P = MC
Total output / each firm’s output = number of firms in the industry
What is the lowest price at which each firm would sell its output in the long run? Is profit
positive, negative or zero at this price?
In long run, profit falls to zero, which means that price falls to the minimum value of AC
P=AC means you earn zero economic profit
- Minimum average cost: MC=AC and solve for q
- Fill in q in MC equation to find p
- Earns economic profit of zero because P=AC
What is the lowest price at which each firm would sell its output in short run?
- The firm will sell its output at any price above zero in the short run, because
MC>AVC for all positive prices (MC=q/100 > q/200). Profit is negative if price is just
above zero
Producer surplus = profit + fixed cost
Is the industry in long-run equilibrium? If not, find the price associated with long-run
equilibrium
- Set P=MC, find q
- Find profit (TR-TC)
- The industry is NOT in long equilibrium because profit is greater than 0, if profit is 0,
industry is in long run equilibrium
, - In long run equilibrium, firms produce where P = MAC, and there is no incentive for
entry or exit
- To find MAC, set MR = AC, and solve for q
- To find the long run equilibrium price: substitute q into MC or AC to get p
Suppose new technology developed to reduce cost firm by 25%. Assuming firm is in long-run
equilibrium, how much would any one store be willing to pay to purchase this new
technology
- New cost and MC function can be found by multiplying old functions by 0.75
- Set P=MC, solve for q
- Find profit (TR-TC) use q
- This is most firm would willing to pay p.y for new technology. It will pay this amount
only if no other firms can adopt the technology. Because if all firms adopt new
technology, long run equilibrium price will fall to MAC of new technology and profits
will be driven to zero
CH9:
DWL refers to benefits lost by consumers and/or producers when markets do not operate
efficiently.
- Price ceiling below equilibrium price in PCmarket will result in DWL, because it
reduces the quantity supplied by producers
- Both producers and consumers lose surplus because less of the good is produced
and consumed
- Reduced (ceiling) price benefits consumers but hurts producers. Real culprit is the
reduction in the amount of the good in the market
Suppose supply curve for good is inelastic. If government imposed price ceiling below
market-clearing level, would a DWL result?
- No DWL because there is no reduction reduction in amount of goods produced
- Imposition of priceceiling transfers all lost producer surplus to consumers
Suppose government regulate sprice of good to be no lower than some minimum level. Can
such a minimum price make producers as a whole worse off?
With a minimum price set above the market-clearing price, some consumer surplus
is transferred to producers because of the higher price, but some producer surplus is
lost because consumers purchase less. If demand is highly elastic, the reduction in
purchases can offset the higher price producers receive, making producers worse off.
Increases by area A, decreases by larger area B, because quantity demanded drops
sharply.
- If suppliers produce more than Q’ loss PC greater because of unsold units
Suppose government imposes tax of $1 to reduce widget consumption and raise
government revenue. What will new eqQ be? What P will buyer pay? What amount will per
unit seller receive?
- Quantity bought must be equal to quantity supplied
- New eqQ: Pb – Ps = 1 (substitute demand and supply functions in Pb and Ps), find q
- What P will buyer pay: plug q in demand equation to find Pb
